*A Strategy for Managing Content amidst Myriad Emerging Network and Consumer Technology Options for Distribution
I. A Strategy for Preserving Content Value and
Maximizing Distribution Opportunities
(A white paper)
“Given the amorphous nature of inflection points, how do you know the right moment to take an appropriate action, to make the changes that will save your company or your career? Unfortunately, you don’t.
“But you can’t wait until you do know: Timing is everything. If you undertake these changes while your company is still healthy, while your ongoing business forms a protective bubble in which you can experiment with the new ways of doing business, you can save much more of your company’s strength, your employees and your strategic position. But that means acting when not everything is known, when the data aren’t yet in. Even those who believe in a scientific approach to management will have to rely on instinct and personal judgment. When you’re caught in the turbulence of a strategic inflection point, the sad fact is that instinct and judgment are all you’ve got to guide you through.”
Andrew S. Grove, Only The Paranoid Survive, Doubleday, 1996, p. 35
I am a content company. The key issue for me as the diverse technologies for delivery of my content unfold is to profitably determine where the appropriate boundary lies between the content I develop and the technological networks I need to deploy and monetize it. This is a key strategic question facing leaders today in print and electronic publishing.
If I am a content company, where is the appropriate boundary between the content I develop and the distribution technology and networks I need to deploy and monetize it? Content and distribution are different, but interdependent, businesses.
What are my key strategies? Where do I make my investments? With whom do I partner? Is my ideal strategic distribution technology partner, in fact, my worst competitive threat?
Content, intellectual property, if you will, is indeed king. When properly managed, it endures in value, making or minting money for several generations regardless of distribution technologies and networks that come and go.
Technological innovation, especially as it relates to content, is a different business, requiring different strategies and investments, but understanding and harnessing technology is a necessary strategy for any content owner.
Many decision makers today are paralyzed by the array of emerging distribution technologies. Held personally accountable for the success or failure of their enterprises, they understandably freeze when considering the questions above.
They may pursue one of two courses. They do nothing and miss the market opportunity, or they jump into bed with the most appealing technology distribution partner, devalue their content franchise or, worse, attach their content to a fad that becomes an orphaned technology. Both courses are motivated by fear.
The purpose of this article will be to explore and explain one potential strategy for content owners seeking to position themselves to nimbly, profitably, and accountably monetize their content in an evolving and constantly changing array of technology-enabled and traditional distribution channels. We will also explore the emerging changes in consumer behavior as it relates to the new technological options.
For clarity, we will discuss content owners/developers and distribution channels or market partners. Publishers generally are the former. Broadcasters comprise both the former and the latter to varying degrees.
The mission of a content developer and publisher is to produce the best, most profitable content, be it books, movies, serial television, music, games, graphic art or information. It is also to maximize long term return on investment by utilizing the most appropriate mix of distribution channels to market the content developed. Innovative distribution technologies have provided a multiplicity of new channels to access new markets that were not anticipated when a great deal of content was developed. Classic movie channels, nostalgia TV, stock footage libraries, ring signals, screen savers, promotional clip licensing, music “oldies” in new movies are all examples.
Content developers would do well to not be distracted by the technology of distribution and to focus on three things: 1) quality content development and acquisition with an eye towards profit, 2) assertive rights management and 3) emerging or morphing markets for their content. Staying laser-focused on quality content production, rights administration and markets is the core business of publishing. Selecting the right distribution partners or technologies may, in fact, be coming to mean choosing the most direct link between artist, writer, director, performer and the end consumer.
The deep fear of being left behind by technological innovation or of suffering margin erosion in hyper-aggregated market channels such as those dominated by Amazon, Barnes & Noble, Wal-Mart, or iTunes is real. As can be seen in book publishing, it has dissuaded content owners from optimizing other opportune channels-to-market for fear of alienating these currently dominant market channels. This creates a desperate and self-fulfilling endgame for content publishers if this fear drives distribution strategy as it only contributes to the strength of the hyper-aggregated market channels. Furthermore, it leaves the development of direct customer relationships solely to the distribution channels.
The business of distribution technology encompasses two technologies, front-end distribution networks and device-driven presentation or playback technologies. Both are needed to bring content to market. They are, however, different, if interdependent.
Networks include satellite, cable, terrestrial broadcast, theatrical chain distribution, Internet download, streaming & P2P, and B2B & B2C physical distribution (Ingram, Amazon, Barnes & Noble).
Playback devices include iPod, Walkman, TV, radio, home stereo, e-book readers, MP3 players, computer download/burn, theatrical projection, and all hard media formats in physical distribution (DVD, CDs, books, prints etc.).
Once distinct lines of business, networks and playback technologies are now merging. This is evident with iTunes and iPods or Sirius/XM and their self-branded satellite music players.
In the investor-driven rush to vertically integrate everything and create corporate megaliths such as the pre-split Viacom, AOL/Time Warner or Disney/ABC, the dream is to own it all, the content, the networks and the player technology. The new contenders are Yahoo, Google and Amazon. This dream is yet to be realized by anyone. The earliest effort was by Columbia in the ‘60s. Sony tried it next and could never make it work. A monopoly over content, networks and players is probably a naïve and unrealistic strategic objective, both from market and from regulatory perspectives. It makes more sense to dominate one line of business than to try to dominate all three with only one core competency.
In the midst of a shifting media landscape, there is an intelligent and consistent strategy for the content owner. It will require four technological investments and will enable content owners to have the agility and control over their content to react quickly to market and technology trends and to withdraw adroitly from them as they fail. The four investments are:
1. compression and digitization
2. digital storage
3. rights management software
4. index and navigation software
In the digital world, content will be developed using traditional, analog and digital technologies. It will all, however, end up in digital formats and storage systems. If one follows the logical lines of business above, it makes sense for the content owner of scale to own, compress, digitize, index, protect and store and serve their own content on their own servers. For startup or smaller publishers, such services can be hired out effectively to service providers who are just that, service providers, and have no deeper aspirations such as equity in your content or customer. (Resolution)
The key complementary value provided by a distribution technology partner is the channel to market (i.e. the network and the player populations) and the transactional intelligence and accountability. They can bring the content to the end consumer, make it work on the consumer’s playback device and charge them for their unique use of the content.
For book publishers, this will be relatively cheap because of the narrow bandwidth requirements of text, but will vary with the degree of graphical content. For owners of vast photographic or image libraries, the cost will be higher. For owners of music, master storage in uncompressed file formats will require considerable storage space, while for owners of vast film libraries, storage will, of necessity, be considerably more expensive. It is not feasible at this point in time to store and serve, for example, an extensive library of long-form HD video programs. The price of digital storage, however, will continue to decreases steadily over time. A good index to watch is the steady cost descent of USB flash cards and back-up systems.
To be very specific, content owners of scale should invest in and manage their own servers and their own digital rights management systems. Compression and digitization is a service they can easily hire, as the investment in Analog à Digital converters and compression technology is rarely warranted. One should see servers as an analogue to a master storage vault at any film, TV or record company. The vault is library-indexed, secure and accessible only to select licensees and market partners. The server is exactly the same. The only difference is agility. The server can respond immediately to a unique customer or market partner request and does not require a media manufacturing interval.
It will be incumbent on the content owner to effectively index their content making it easily accessible to internal and external searches. Adding “affinity” or a correlative logic network linking appropriate content will further enhance the ability to monetize it.
A major added value to the rights holder of scale in this strategy is that all sale transactions are recorded both by the licensee or market partner and the original rights holder. In traditional arrangements, the rights holder relies heavily on the integrity of the licensee in accounting for and reporting sales and consequent royalties due. This has been the source of endless friction and litigation. It has also been the source of a fruitless standoff between rights-holders and would-be licensees. The rights-holder/content owner, mindful of the historical pattern of under-reporting or not reporting at all and, following the age old axiom of “get it all up front, cause you’ll never see another dime beyond the advance,” asks for an astronomical advance, rarely gets it and kills the deal. Both content owner and potential licensee lose the opportunity. With server technology, sales transactions of any volume will reconcile between owner and licensee and there will be no debate over licensing revenue as both licensor and licensee will be accounting technically for the same transactions. This means in, effect, that the requested advance could be an amount needed to cover the integration costs only. The content owner can simply generate their own royalty statement and the licensee’s failure to pay in a timely manner simply means a cut-off to content access at the server.
Another great value of the proposed model is agility. Many sales today are generated by buzz, news events, related promotions or other ad hoc events. The record for bringing a book to market after a world event is something like 21 days. The time to bring a CD to market after a stunning concert debut, or to replenish a sold-out film on DVD after an unexpected box office success is measured in weeks, if not months. The agility afforded by content owners having their properties ready to serve digitally, indexed and accessible is vital to maximizing sales. Having the right content in front of the right market at the right time will give the content owner maximum advantage in monetizing their content effectively.
By way of example, an international entertainment figure dies. Their biography is ready to serve from A&E’s Biography channel, the news report from CBS is available to serve from the CBS news server. The films in which they have starring roles, or their CDs, or books, are ready to serve in total, or in clips, or unique songs, or audio clips immediately. Their news obit and related photos are available to serve from the New York Times.
In this changeable and exciting time for media distribution, a number of content owners are making egregious, possibly irreversible and in many other ways damaging decisions – they are pricing their content at the whim of a vogue, novel distribution channel rather than to the property’s intrinsic value; in doing so they are missing the enormous possibility to capture a much greater share of customer/market demand than they have traditionally enjoyed.
The key insight here lies in the following four concepts:
1. Timing Should not be a Driving Factor
a. There is no rush to market. If iTunes and other distribution networks are successful, the opportunity to sell cheaply will still be there in 6 months.
2. Content Holders are Monopoly Providers of their Assets
a. Many content owners enjoy a monopoly or near monopoly position as the sole supplier / rights holder of their property.
b. This position has traditionally been hard to monetize due to limited distribution opportunities.
c. This fact has traditionally been lost on content owners because of the dominance of the distribution channels in the pricing equation.
3. New Technologies offer Exciting Opportunities to Version Content
a. Computer chip manufacturers and software companies sell the same pieces of hardware or software with different features enabled or disabled and thereby capture a greater number of customers at prices they are willing to pay.
b. Media distribution has evolved as follows:
i. Prior to 1980 there were two main distribution channels
1. Movie theaters
2. 3 networks
ii. Between 1980 and 1990, two new channels emerged
1. VHS tape for the home market
2. Cable networks
iii. The period between 1990 and 2005 saw the following changes:
1. Cable channels solidified their position in the market
2. DVDs replaced the VHS tape
iv. The immediate future will be characterized by a shift of distribution power back to the content holders, often for the 1st time, as they establish their increased ability to time, price and version their content.
4. Downloads Enjoy Features that make them highly “Versionable”
a. They are currently of lower quality than what is available on DVD
b. Downloads are available almost immediately, as opposed to DVDs which are available in a few days via the web or with a trip to the video store
c. Downloads are available on a distribution platform whose costs are fundamentally and permanently lower which allows the flexibility to present the market with a much lower price point
It should be noted that, although most content holders are the monopoly providers of their media product, they may not enjoy a monopoly market position for the following reasons:
A. Long-term licensing agreements may not allow the owners to change distribution course too rapidly.
B. Certain properties have far more readily available close substitutes than others.
C. Many content providers are not yet affiliated with a benign distribution provider who is willing and able to share the pie equitably with the content providers.
D. Some content is more “perishable” than others, and therefore strong existing channels may remain the dominant means of distribution for certain programming.
The recent decision by some television networks to make available in-season shows on iTunes for $1.99 is driven more by the ubiquity of the distribution channel than a thoughtful market valuation of the content. This friction is now playing out between the music industry and iTunes over their desire for split-level pricing for hits and backlist. The same issue will emerge for film and video.
Price should reflect value and market and not be skewed by the ubiquity or dominance of the distribution channel. This lesson ought to have been learned by the dire impact on book publishers and record companies in the loss of diverse retail channels, specifically, indie book and record stores to the dominance of a few highly aggregated channels comprising about five club stores and two mass marketers, Amazon and Barnes & Noble.
Pricing may indeed be variable, reflective of the consumer sales channel. Consumers are generally either price-driven or “brand-trust” and convenience-driven. This means that a $25 book may sell quite well at MRP and also do very well at the discounted price of $17. It will depend on the channel of presentation and what drives the consumer. Also, traditional notions that “back list” or “deleted” product is worthless must now be wholly re-examined in the light of “The Long Tale.” Are these, in fact, unsaleable goods or “archival collector editions” when the cost of inventory replenishment is removed? It’s all in the marketing.
Another emerging opportunity for multi-tier pricing is the emergence of a videophile market, again driven by new technology, the plasma screen and HDTV. The resolution of the media format or degree of download compression will enable various price points. In hard media, most likely there will be at least two opportunities for tiered-pricing, DVD and HDVD. In network distribution there may well be three tiers: highly compressed downloads for portable players, cell phones and laptops, mid-tier compression for standard TV’s and as more “last mile bandwidth” is built, HDTV downloads for the “home theater.”
It is dubious that the “number of playbacks” concept will fly with consumers or survive the onslaught of hackers.
Price ought to be determined by both market and cost factors:
1. Aggregation or bundling (one episode for $5.00, the whole series of 13 for $49.00)
2. End-market demographic (a golfer will pay more than a skateboarder)
3. End-use and resolution of the delivery format (a Fortune 100 corporation will pay more for a photo image on the cover of their Annual Report and will require a hi-res .TIF file, whereas a 3rd grader will pay less for use as a book report cover and will only need a .JPEG. An owner of an HD plasma TV will pay more for Titanic in HDTV in film aspect than they will pay for the DVD at market price.)
b. digitization & compression and/or manufacturing
5. Durability of value in time i.e. news, stock quotes, weather vs. content that becomes “evergreen” or classic and may even increase in value over time.
6. Sole Source & Competition: The content owner generally enjoys monopoly, but the cost of similarly versioned product from competitors will play in determining price.
The film content owner has pricing in place for, and access to, the entire work, a dramatic segment, the trailer, stock footage or a frame.
The music company has a discography, a CD, a song, a tease, a sample.
A news organization has the entire news show, a segment, stock, or a screen grab.
A book publisher has the bibliography, a book title, a chapter, a page or a quote.
A magazine publisher may have life-to-date content (New Yorker), single issue, article or a quote.
A graphical content owner, museum, photo collection, image archive, artist, poster company has all art by one genre, artist, region or a specific image.
All content is stored in a “master” format with minimal compression and digitization artifacts. The server can serve in master quality or compressed quality depending on price, rights, distribution bandwidth and end use:
Video: Master: HD or DigiBeta Distribution: WM-9,
Audio: Master: Wave Distribution: MP3
Graphic: Master: EPS, QXD, PSD, PDF Distribution: PDF
Photo: Master: Hi Res JPEG, TIF Distribution: JPEG
Text: Master: PDF: Distribution: PDF
The key strategic elements in the new world of content exploitation will be commerce integration agility (speed), content indexing & navigation (access) and rights management (security).
The content owner that has these strategies in-house will, without compromising their brand or their content value, be able to interconnect with commerce networks anywhere in the world and account for the use of their content.
III. Distribution options for the content owner, publisher or broadcaster
Once the content owner has clearly established their own strategy for storing, serving and accounting for their content, the distribution decision becomes paramount. There are myriad marketplace options for distribution and our purpose here will be articulate and discuss their relative merits. In the final section, we will openly make a case for using Resolution as a market service partner.
Key deciding factors are both consumer brand strength and channel strength. They determine the extent to which the content owner can generate their own demand and not rely heavily on a market partner except to fulfill demand. Let’s look at each situation individually.
Consumer brand strength, as distinct from financial brand strength, means specifically the degree to which the consumer can intuitively understand the nature and quality of the products sold by the company. Viacom or CBS are financial brands and means little to the consumer whereas MTV or Survivor are consumer brands and generate an intuitive catalog in the consumer’s mind. Turner is a financial brand, whereas the Cartoon Network and TCM are consumer brands. Hachette is a financial brand whereas Car and Driver and Elle are consumer brands. This distinction defines the ability of the consumer brand to generate its own demand in its target market or, conversely, to rely on a market partner to generate that demand for them. Sesame Street generates a virtual catalog in the consumer’s imagination of desirable products. Liberty Media does not.
Channel Strength is a capacity beyond asset strength. Asset strength defines the quantity and quality of content holdings and their long range profitability. Channel strength determines the content owners’ reach into their target markets. That reach may be defined by broadcast media holdings (TV), magazine circulation or number of theaters in a theater chain, chain retail ownership, listenership (radio), ratings etc. The industry term “O&O” meaning “owned and operated” is a perfect descriptor of channel strength, referring to the number of stations a content owner/developer owns and operates. Traditionally, the number of O&O’s has been restricted by regulation to limit the combination of asset and channel strength to dissuade vertical integration. Those regulations have been lifted over time.
The extent to which a content owner has either broad consumer brand strength or channel strength (market reach), are the major determining factors in what method of distribution it should choose to access its markets. Strong consumer brand strength, for example, means a greater opportunity for Web commerce with less investment because the brand is intuitive to the consumer, as will be the URL, assuming they match. This mandates a much more aggressive B2C strategy. Combine this with channel strength, the ownership of strong broadcast assets, and one can drive consumers both to a Webstore (B2C) and to retail locations (B2B). A careful assessment of consumer brand strength and channel strength will determine the appropriate B2B or B2C market distribution strategies.
I. Key considerations and principles for setting a distribution strategy include:
1. Margin – Maintaining an appropriate mix of channels-to-market and consequent spectrum of sales margins is of critical importance for the content owner, not becoming overly dependent on a high-volume, low-margin market channel, but mixing direct and mass markets channels in order to optimize the mix of margins and yield better profits from content.
2. Transactional intelligence – The technological infrastructure needed to transact sales either in the B2B or the B2C channels is becoming increasingly complex, driven by regulatory requirements, security considerations, 8000+ taxing authorities, returns management, shipment manifesting, consumer service expectations (B2C) and “vendor compliance” requirements (B2B) such as required EDI protocols. The ability to account for both B2B and B2C sales, legally and in a way that satisfies both consumers and wholesale customers, is becoming more of a technical challenge. Returns management alone accounts for an increasingly large part of the transactional intelligence equation. Done right, the pay off here is a happy customer in either channel who will continue to do business with you if the sales experience is an efficient and satisfying one. In addition, a big part of transactional intelligence is customer care. The “dot.com” assumption that one did not need customer service was proven deadly wrong in all cases.
3. Agility – The market for content is more mercurial and dynamic and will only become more so. The ability to react with agility to news events, content-related successes, good reviews and markets trends and fads will be paramount in maximizing profits from content.
4. Integrity – Choosing partners who have an established track record, who have developed and maintained strong channels to market and have a reputation for timely and accurate revenue accounting and delivery is of paramount importance.
5. “Long View” Strategy – Ensuring an investment in the development of future revenue streams by not always acting on the most immediate opportunity that might deliver quarterly sales if it then undermines a more lucrative development of emerging channels-to-market or erodes the enduring value of the content.
II. Distribution options and market partners:
1. Self-distribution: In this model, one takes on the entire investment in order processing, transaction processing, warehousing and fulfillment infrastructure: a call center with its automatic call distribution system (ACD), an e-commerce integration team, merchandisers, data analysts, mail processing, credit card processing, order entry, data security systems, regulatory compliance, address standardization, sales tax software licensing, warehouse and infrastructure, pick logic and inventory maintenance systems, shipping and manifesting systems. This will not only run into the tens of millions of dollars from a capital investment standpoint, but will also require very substantial ongoing overhead to keep systems up to date and operating with any efficiency. By way of example, there are over 8000 sales taxing authorities in the US alone and these must be updated weekly.
In general and except for the very largest of content enterprises, such investments rarely make sense and only serve to burden the enterprise with immense overhead and a distraction from core competency. The cost effectiveness of these operations are a function of their ability to scale in size and consistently lower the cost of each transaction.
2. Conventional two-tier distribution: This is the traditional and waning model of distribution and assumes that content will be distributed in hard media such as books, CDs, posters, DVDs and the like. It is characterized by the likes of Baker and Taylor and Ingram, Sony, Universal, all well established two-tier distribution companies, albeit in flux. In this model, product is acquired at about 55-60% off MRP and resold into retail at 40-50% off MRP – a thin margin. Originally, in this model, the distributor generated demand with a field sales force that was commissioned. This still holds true for some larger companies, but by and large demand creation has become the obligation of the content owner/publisher. The great advantage that very large and diverse distributors have is their ability to aggregate product shipments to the retailer. A retailer can order from 25 publishers and receive one shipment. However, as retail channels aggregated and strengthened, becoming less diverse, margins melted away and the concept of two-tier selling has become ever less tenable. A decade ago, major content owners began bypassing distributors and selling direct to the aggregated retail channels like the big box stores. This, along with the migration to digital network distribution, weakened the once strong two-tier distribution system making it less attractive, although many distributors have worked hard to adapt to these market changes.
Although still a robust means of selling very high volume at generally low margins, this traditional channel to market is being challenged both by B2B and B2C e-commerce direct selling efficiencies.
3. Licensing: In the licensing model, a content owner simply endows an appropriate manufacturer/distributor with the right to sell their branded products. A content company such as Sesame Workshop will carefully choose a market partner / licensee whom they believe will maximize the value of the content they develop. They choose partners like Mattel and Sony who bring their product to market and pay a royalty or licensing fee for all products sold as a percent of sales revenue, usually on the order of 8-14% depending on the relative strength of the brand in the market.
Licensing is still a viable method of realizing profit from creative content. It focuses and maximizes an enterprise’s resources on creative development and leaves the sales and marketing to licensee/partners. It may not be the most lucrative return on the creative investment, however, and it does not always take best advantage of the brand. One seeking a Sesame Workshop plush toy will not find it intuitive to type “Mattel” into their search engine.
4. Affiliate Sales: This is the lowest margin option and should be considered only when very little sales volume is anticipated. In this model, all sales requests or inquiries are referred to an online retailer such as Amazon or eBay. They manage the transaction, fulfill the order and return an “affiliate fee” to the sender of 5-10%. The sender has no future opportunity for a sales relationship with their customer. The customer becomes the property of the affiliate referral.
This type of relationship may be appropriate to vanity CD, DVD or book publications, but, in general returns such low returns as to not warrant serious consideration by content owners.
5. Market Service Partner: Resolution is a market service partner. Its mission is to develop and manage the most direct and cost-effective channels to market and to partner with clients to maximize the influence of their brand and the profit inherent in their content and products. Resolution manages B2C, B2E (educational) and B2B channels-to-market and services them from a single inventory that is optimized for:
a. New release to “street date”
b. High-volume hit product replenishment
c. Evergreen library maintenance
d. Re-introduction to market of deleted titles (“The Long Tale”)
Inventories are managed for optimum fill rates and minimum inventory risk. Lower volume, evergreen media product such as CD’s, DVD’s, posters and (soon) books are made-to-demand. A proprietary algorithm manages “least-cost manufacturing.”
Resolution partners with its clients to develop an appropriate brand strategy, a Web commerce presence reflective of that strategy, a consistent sales-inducing, data-rich bond with each online customer, an intelligent inventory and product development and sourcing strategy, and sales campaign development and execution driven by unique customer analytics and broad d/b analysis. Running flawlessly in the background are three customer sales development & service centers servicing the unique, consumer, educational and wholesale markets and a “same day, every day” product fulfillment center.
The key value of such a distribution option is reflected in the principles above: margin, agility, integrity and “long- view” strategy as well as the many options that such a partnership enables.